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Imagine a day in which a governor declares a state takeover of a major American city facing an economic crisis, while the federal government slashes $85 billion from its annual expenditures, including an estimated $11 billion in Medicare outlays and $43 billion in defense spending, plus cuts to interest-rate subsidies for a popular type of municipal bond. You might think that would be a pretty bad day for the muni market.

That day was Friday. Michigan's governor appointed an emergency fiscal manager for Detroit as that city falls deeper into economic crisis, while the once-unthinkable federal sequester kicked in, crimping the finances of local governments sensitive to federal largesse (and to similarly sensitive industries) and cutting the federal component of the interest payments on Build America Bonds.

Why the seemingly blasé attitude? For one thing, few asset classes are as battle-hardened as munis at this point. The market recovered after six months of outflows set off by alarmist default predictions in late 2010. It then survived ultimately unrealized threats to muni-bond tax exemption ahead of the fiscal cliff late last year.

Many current problems have been telegraphed well in advance, giving the market time to adjust. Detroit's situation is merely the latest step in the city's long decline, and the sequester is just the latest in a series of self-inflicted federal budget crises.

"For state and local governments, many of which rely on economically sensitive income and sales taxes, sequestration will mostly be felt through lower government purchases and lower incomes of federal employees and contractors caused by staff cuts, furloughs and contract terminations," Moody's Investors Service said last week, noting the impact will be gradual.

On Friday, Morgan Stanley Smith Barney muni strategists John Dillon and Matthew Gastall said sequestration "could have a meaningful, but likely manageable, impact" on state and local governments, with the most acute pressure in states with heavier concentrations in defense.

Munis also take their cues from the Treasury market, which benefited from a safe-harbor bid last week ahead of the sequester and after an inconclusive Italian election. The 10-year note yield fell to 1.845% Friday from 1.964% a week earlier.

STATE AND LOCAL FINANCES, though under perpetual duress, have shown remarkable resiliency. Local governments will make deep cuts to payroll and employee benefits, typically their biggest costs, before forcing any losses on bondholders.

"With only a few high-profile exceptions, state and local governments have exhibited their willingness to impose cutbacks in response to a weaker revenue environment," Standard & Poor's wrote last week. S&P said state and local governments have reduced their employment ranks by 1.05 million, or 5.3%, since 2008, and that sequestration will likely cement these recession-induced job reductions for a while longer. "Difficult as it may be, reducing operations and generally embracing greater austerity at the state and local level has largely preserved these governments' debt-paying abilities in recent years."

Like those local governments, the muni market finds ways to adapt, even if it means embracing austerity rather than economic growth. Expect munis to adapt again.